The Great Depression Online




Great Depression Online Archive Issue:

Going South

Great Depression Online
Long Beach, CA
April 22, 2008

Inside This Issue You Will Discover…

*** Larry Kudlow and the U.S. Peso
*** You Do What You Do…And You Get What You Get
*** Going South
*** And More

Larry Kudlow and the U.S. Peso

We don’t watch financial talk shows.  In fact, we don’t even get cable.  But a friend recently told us that Larry Kudlow, of the popular TV program, Kudlow & Company, has been referring to the dollar as the U.S. Peso.

Apparently, he’s concerned about its loss of value. 

Yet for the Federal Reserve it’s of secondary concern.  They’d rather try and buoy the economy by printing more debt based money regardless of if it sinks the dollar.  We believe the economy and the dollar are both taking on water.  And that further rate cuts, while they may postpone the inevitable, will ultimately make things worse for the economy and the dollar…not better.

But who are we to decide – or know best.

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And while we may not care much for Kudlow – and his bloviating – we’ll consider his peso analogy.

You Do What You Do…And You Get What You Get

In the early 1990’s after – 12-years of economic malaise – Mexico was primed for an economic boom.  NAFTA had been approved and everyone just knew that Mexico was going to be the next big thing.  The world took note and foreign investment flooded into the country inflating the value of the peso.

The administration of then President Carlos Salinas de Goratri couldn’t believe their good fortune.  For out of the Aztec sun vast amounts of money had appeared like a tequila induced vision of riches.  Like any good government…they spent their bonanza – and then they spent some more.

By the end of 1994 Mexico was running a deficit that was 7-percent of GDP.  And foreign investors had seen enough.  They dumped their holdings and the peso crashed.  In the space of one week the peso fell 44-percent against the dollar.  Mexico’s economy then crashed too.

It’s very simple.  You do what you do…and you get what you get.  When you spend more than you make the debts must be reconciled one way or another.  If a country’s debt increases too much as a percent of GDP, its currency takes a hit.  Next goes its economy.

Going South

Is Larry Kudlow on to something?  We know the dollar has slowly been losing value over the last five years.  But could an all out route on the dollar happen to the United States?

Is the U.S. somehow immune to a dollar crisis?

Now, in 2008, the U.S. economy shares some characteristics with Mexico in the early 1990’s.

Peter Morici, professor at the University of Maryland School of Business, and former Chief Economist at the U.S. International Trade Commission shares the severe specifics facing the United States economy.

“…the Commerce Department reported the 2007 current account deficit was $738.6 billion….  The deficit exceeded 5.3 percent of GDP.

“In 2007, the United States had a $106.9 [billion] surplus on trade in services and a $106.9 billion surplus on income payments.  This was hardly enough to offset the massive $815.9 billion deficit on trade in goods, and net unilateral transfers to foreigners equal to $104.4 billion.

“The huge deficit on trade in goods is mostly caused by a combination of an overvalued dollar against the Chinese yuan, a dysfunctional national energy policy that increases U.S. dependence on foreign oil, and the competitive woes of the three domestic automakers.  Together, the trade deficit with China and on petroleum and automotive products total at least 100 percent of the deficit on trade in goods and services.

Here’s how Americans are getting by…

“To finance the current account deficit, Americans are borrowing and selling assets at a pace of $600 billion a year.”

“Foreign governments loaned Americans $412.7 billion or 3 percent of GDP.  The Chinese and other governments are essentially bankrolling U.S. consumers, who in turn are mortgaging their children’s income.”

This can’t go on forever.  Yet, under current circumstances, this debt will not be repaid…especially when the Federal Reserve is encouraging U.S. citizens to take on more debt by further lowering interest rates.

With the U.S. economy backing into a recession, and deficit spending increasing – data last reported by the Commerce Department for February 2008 showed it increasing at a rate of 5.7 percent – the deficit as a percent of GDP should spike upward.

Foreign investors gave Mexico a deficit up to 7-percent of GDP.  How much will China give the U.S. before they begin to dump their dollars in fear…or disgust.

While this debt may not be repaid – one way or another, it will be reconciled.  And unless dramatic changes are made, the dollar’s value will go the way of the peso.

In other words, it will go south.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  As the dollar continues its trip south…all you dollar based asset investments will go south too.  But not if you have investments in ETFs.  If you want to capitalize on the ETF boom, then this report – The ETF Advantage – is for you.  In it, we'll show you how to make ETFs work for your portfolio -- in ways and in securities that you probably never imagined before.  Learn more here: A Simple Way to Invest Outside of the Dollar.

 

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